NTPC tax-free bonds issue is out. The issue opens on September 23, 2015 and closes on September 30, 2015. NTPC was allowed to raise Rs 1,000 crores by the Government in FY2015-2016. The company has already raised Rs 300 crores by way of private placement and has come up with a public issue for the remaining Rs 700 crores. 40% of the public issue (i.e. Rs 280 crores) is reserved for the retail investors. In this post, I will discuss various term and conditions of the issue, interest rates on offer, taxation and whether you should invest in these bonds. If you want to know more about tax-free bonds in general, please go through the following post.
NTPC Tax-Free Bonds Issue: Salient Features
Bonds will be issued to successful applicants at the face value of Rs 1,000. The bonds are available in three different maturities i.e. 10, 15 and 20 years.
Interest Rate/ Coupon
You can see the bonds are better for investors who fall in the higher tax brackets. For investors in the 10% slab, you can find similar pre-tax yields even in the bank fixed deposits. The investors in 30% tax bracket get the maximum benefit.
Please note the total issue size is Rs 700 crores (for the three series combined).
Please note that by investing in these bonds, you can lock in the interest rate for the long term. It is a valid argument. You will not find a fixed deposit of tenor greater than 10 years. However, I cannot speculate on the direction of interest rates in the future. If this is the reason for you to invest in these bonds, you have to take a call yourself.
Who qualifies as a Retail Investor?
A retail investor can invest up to a maximum of Rs 10 lacs (face value) in these bonds. If you hold these bonds worth more than face value of Rs 10 lacs (on the record date of payment of interest), you will not be classified as a retail investor and will get a lower coupon (7.11% instead of 7.36% for 10 year maturity).
Thus, you can get higher coupon rate if you hold no more than 1000 of these bonds. Please this is the aggregate number across all the series of this bond. Hence, to be classified as a retail investor, you cannot hold more than 1000 bonds across the three schemes. Your PAN will be used to aggregate your holdings and determine if you are a retail investor.
Can NRIs invest in NTPC tax-free bonds?
Yes, NRIs can invest in these bonds but only on non-repatriation basis i.e. maturity/sale proceeds cannot be repatriated outside India. NRIs can get similar or better interest rates in NRE fixed deposits. Interest on NRE fixed deposits is tax-free too.
Credit Rating/Credit Quality
The bonds have been rated AAA by both ICRA and CRISIL, which is the highest rating that can be given to any debt instrument. I take little comfort from these ratings as the rating agencies are almost always behind the curve (at least as far as corporate debt is concerned). I will also not comment on the company financials as I do not have the requisite expertise. You are requested to do that analysis on your own and not rely on credit ratings.
However, I take comfort from the fact the Government of India holds almost 75% stake in NTPC. So, I hope the government will come to the rescue of bond holders if something were to go wrong with the company. Please note the Government of India is not obligated to do so. This is just my hunch. So, I do not really worry about default from the company.
Exit before maturity (Liquidity risk)
Though the bonds will be listed on stock exchanges, the liquidity will be quite low (given the size of issue). Lower liquidity also leads to higher bid-ask spreads. So, if you are looking to exit in the secondary market, you might have to exit at a price lower than the intrinsic value.
Capital Gains
If you hold the bonds till maturity, there is no question of capital gains. Bonds prices and interest rates move in opposite directions. When the interest rates go up, bond prices go down. On the other hand, when the interest rates go down, bond prices go up. So, if you expect interest rates to go down in the future, you can invest in these bonds for potential capital gains too. However, do keep the liquidity risk in mind if you are betting on favourable interest rate movement.
Tax Benefits
Interest on these bonds is tax-free. However, there is no tax benefit on the investment amount under Section 80C. If you sell the bonds before one year, short term capital gains will be taxed at your marginal income tax rate (as per your income tax slab). If you sell after one year, long term capital gains will be taxed at a flat 10.3% (including cess). Please note there is no indexation benefit available for listed bonds such as these. You can go through this post for comparison of tax treatment of tax-free bonds, debt mutual funds and fixed deposits.
Should you invest?
Investors falling in the higher tax brackets and looking for regular income can look to invest in these tax-free bonds. There is little incentive for investors in 10% income tax slab to invest in these tax-free bonds. The investors in the 30% tax bracket will benefit the most.
As mentioned above, the allocation is on First Come First Serve basis. So, if you plan to apply, do it fast.
Deepesh is a SEBI registered Investment Adviser and Founder, PersonalFinancePlan.in
3 thoughts on “NTPC Tax-Free Bonds : Should you invest?”
i am 83 years old.can i buy any of the tax free bonds now. what is the benefit for me. how and where i have to buy them. i have dmat a/c.
kindly oblige with particulars.
natarajan
Dear Sir,
You can purchase from the secondary market but liquidity can be issue. Talk to you broker. He/she will guide you.
However, you must see if you need to purchase.
1. Income up to Rs 5 lacs is exempt for you.
2. Even FD interest is exempt upto Rs 50,000 per annum.
3. The price of the bonds would have shot up by now, effectively bringing down yield.
4. When you want your money back, you may not be able to get it back easily (or at a fair price).
Can these tax free bonds be gifted?
If so what are the implications?
If gifted to blood relatives?
or
to others?